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Trump’s recent “TACO moment” (tariff threat + U-turn), the resulting global markets rally, and what it could mean for labour markets and interest rates.

In this article, we would like to share how we can look at it in a a clear, evidence-based update.

What happened: the “TACO moment” and tariff U-turn

Tariff threat and reversal (“TACO trade”) Markets initially sold off after Trump threatened to impose new tariffs on European countries tied to a push over Greenland. The sell-off was significant because it raised fears of escalating trade tensions and potential retaliation.

However, Trump subsequently walked back the tariff threat after announcing a framework for cooperation with NATO on Greenland — effectively postponing or canceling the tariffs that were to start on February 1. This reversal fits a pattern markets have come to expect: big threat, then retreat — called the “TACO trade.”

Market reaction

• U.S. major indices rallied (S&P 500, Dow, Nasdaq up strongly).

• European and Asian shares also advanced on reduced trade-war fears.

• Broader risk assets improved and volatility gauges fell.

Why markets rallied — mechanics and psychology

Tariff risk = macro risk premium - Tariff escalations raise input costs, disrupt supply chains, and reduce business confidence. When such threats intensify, investors demand higher risk premia, pushing equities lower and bond yields sometimes volatile. Removing or delaying tariff risks reduces that risk premium, enabling markets to rebound.

Relief rallies are data-driven - Even if economic fundamentals don’t change, uncertainty reduction alone can trigger strong rallies because asset prices often overshoot on fear. This is why the markets responded sharply to the U-turn.

Historically, such moves do not guarantee sustained rallies unless backed by broader fundamental improvement.

How this interacts with employment data

Tariffs and employment are linked but lagged

Higher tariffs increase input costs, potentially suppressing investment and hiring. Academic work suggests broad tariff escalation could reduce global employment, particularly in vulnerable sectors.

Reductions or cancellations of tariffs can ease these pressures, but labour markets adjust slowly — hiring decisions, wage negotiations, and expansions take months or quarters to reflect policy shifts.

Current U.S. employment environment (latest data context) Without specific current employment figures, we know generally in mid-2025 markets were grappling with mixed jobs reports and growth slowdown concerns. Tariff policy created additional uncertainty that weighed on hiring sentiment. If tariff escalation is halted, some firms may delay layoffs or postpone hiring freezes, but a meaningful turnaround in official employment figures typically takes multiple months.

Interest rates and the Federal Reserve decision

Monetary policy drivers - Central banks, including the U.S. Federal Reserve, base rate decisions on a combination of:

• Inflation trends,

• Labour market conditions,

• Growth prospects,

• Financial stability considerations.

Tariffs + inflation - Tariffs can be inflationary (higher import costs), which would normally argue against easing rates. But if tariff threats damp future growth or demand, that could counterbalance inflation pressures. Fundamental data — core inflation, wage growth, and labour participation — will steer rate decisions.

Market rally ≠ rate cuts - Stock rallies alone do not compel central banks to cut rates. They look at real economic data:

• If employment remains strong and inflation persistent, the Fed will likely keep rates steady or even tighten.

• If employment weakens significantly and inflation falls back toward target, then cuts become more likely.

As of market data updated on January 22, 2026, there is an approximately 5% to 6% probability of a rate cut at the upcoming FOMC meeting on January 28, 2026. The overwhelming consensus among market participants and economists (around 94% to 98% probability) is that the Federal Reserve will hold the current target rate steady at the 3.50% to 3.75% range. 

Given the recent rally reflects reduced policy uncertainty rather than a clear change in inflation or jobs trends, the probability of an imminent rate cut based on the rally alone is limited.

The US unemployment rate edged down to 4.4% in December 2025, from a revised 4.5% in November, which had marked the highest level since October 2021. The reading also came in slightly below market expectations of 4.5%. The number of unemployed fell by 278,000 to 7.50 million, while employment increased by 232,000 to 163.99 million.

Scenario outlook: will the rally continue?

Bullish drivers

• Continued de-escalation of tariff threats could sustain sentiment.

• Better corporate earnings and strong macro data would reinforce gains.

• Lower perceived geopolitical risk supports risk assets.

Bearish risks

• Renewed tariff threats or other geopolitical tensions could reverse gains quickly.

• Weak job market or slowing economic indicators would undermine confidence.

• Central banks maintaining higher rates longer than markets expect could pressure stocks.

Probability assessment - Markets are forward-looking and discount expected future fundamentals. A temporary TACO-style reversal supports rallies, but sustained market expansion requires broader fundamental improvement, particularly in growth, jobs, and clarity on monetary policy.

Summary

Conclusion: The recent rally is real but fragile. It is driven mainly by uncertainty reduction rather than immediate improvements in core economic data. For employment data and interest rate decisions to improve sustainably, underlying economic fundamentals must strengthen beyond tariff rhetoric.

In the next section, we will discuss a concise, evidence-based forecast of likely Federal Reserve actions in 2026 and a risk scenario analysis for equity markets, grounded in the latest macroeconomic data and market research available as of January 2026.

Federal Reserve Likely Path in 2026

Base Case: Hold Then Data-Dependent Easing

• Economists widely expect the Fed to maintain the current federal funds rate range (about 3.50%–3.75%) through at least Q1 2026 on strong growth and inflation above the 2% target.

• Inflation pressures remain “sticky” — core inflation above target and decelerating only slowly, which supports a cautious stance rather than aggressive easing.

• Fed officials (e.g., Mary Daly) have characterized policy as well-positioned and highlighted a deliberate, data-dependent approach rather than a fixed easing timetable.

Expected Action Sequence

• Q1 2026: No change in policy rate as inflation persists and job growth stabilizes.

• Mid-year: Conditional rate cuts may begin if employment weakens and inflation shows durable descent toward the 2% target. Most market forecasts signal the potential for 1–2 cuts (e.g., 25-50 basis points total) through mid to late 2026.

• Late 2026: Final timing and depth of easing will depend on labour market trends, inflation consistency, and financial conditions. If growth unexpectedly accelerates or inflation resurges, easing could be delayed or scaled back.

Alternative / Divergent Views

• Some models project no cuts through 2026 — especially if inflation remains elevated and growth stays robust, which would keep rates on hold rather than cutting.

• Other scenarios factor in persistent labour market strength with sticky inflation, reducing the Fed’s space to ease significantly.

Fed Drivers in 2026

Concise Forecast Summary

• H1 2026: Likely hold, with the first conditional cut possible by mid-year if inflation softens.

• H2 2026: Possible 1–2 cuts (25-50bps) depending on labour market and inflation evidence.

• Risk to outlook: Sticky inflation, strong real activity, or a resilient labour market could delay all cuts.

Equity Market Risk Scenario Analysis for 2026

Bullish Scenario — “AI-Led Growth Continuation”

Underlying Conditions

• GDP growth moderates but remains solid (~2–3%).

• Corporate earnings expand, driven by AI investment and productivity gains.

• Monetary policy becomes moderately more accommodative later in the year, lowering discount rates for equities.

Market Implications

• Equities rally on earnings expansion and improving macro data.

• Technology and AI-sensitive sectors lead gains, with broad indices posting mid-to-high single digit to double-digit returns across regions.

• Risk assets remain supported as consumer and business confidence stabilizes.

$Technology Select Sector SPDR Fund(XLK)$ $Consumer Discretionary Select Sector SPDR Fund(XLY)$ $Financial Select Sector SPDR Fund(XLF)$

Neutral Scenario — “Soft Landing”

Underlying Conditions

• Growth slows but avoids recession.

• Inflation declines gradually toward target; the Fed cuts modestly.

• Labor market stabilizes without sharp deterioration.

Market Implications

• Broad equity markets grind higher but with high dispersion across sectors.

• Defensive and quality stocks outperform cyclicals when volatility increases.

• Valuations remain elevated, but markets don’t fall materially.

Bearish Scenario — “Inflation Persistence + Policy Hold”

Underlying Conditions

• Inflation remains stubbornly above the Fed’s target, delaying rate cuts.

• Growth weakens and labour markets soften, reducing earnings prospects.

• Monetary policy remains restrictive longer than priced in.

Market Implications

• Equities experience multiple corrections as earnings expectations adjust.

• Volatility spikes and risk premiums rise, especially in high-valuation segments.

• Defensive sectors and fixed income outperform risk assets.

Key Risk Factors Across Scenarios

• Inflation stickiness: Sustained above-target inflation limits Fed easing and raises discount rates.

• Labour market deceleration: Weak hiring triggers growth fears and pressures risk assets.

• Geopolitical / policy uncertainty: Tariff volatility, central bank credibility questions, and fiscal shifts can trigger sharp repricing.

• AI investment outcomes: Overinvestment or rapid deceleration in tech spending could create valuation reversals.

Summary Forecast

Federal Reserve

• Most likely: Hold in early 2026, modest cuts mid-to-late year if inflation eases and jobs soften.

• Less likely: No cuts if inflation stays elevated and growth remains robust.

Equity Markets

• Bullish: AI-led earnings + moderate easing → solid gains.

• Neutral: Soft landing → steady gains with volatility.

• Bearish: Inflation stickiness + delayed cuts → downside risks dominate.

Bottom Line: Markets appear poised for a continuation of macro-driven rotation — where data (inflation, employment) and policy (Fed decisions) remain central to equity performance through 2026.

Summary

In January 2026, the global market experienced a volatile "whiplash" effect driven by President Trump’s shifting stance on trade and geopolitics.

The "TACO" Moment and Tariff U-Turn

The TACO (Trump Always Chickens Out) trade refers to a market pattern where investors "buy the dip" after aggressive presidential threats, betting on an eventual reversal. On January 21, 2026, this theory was validated again:

• The Threat: Earlier in the week, Trump threatened a 10% tariff on eight NATO allies (including the UK, Germany, and France) to pressure Denmark into a deal for Greenland, causing markets to tumble.

• The U-Turn: In a Davos speech, Trump backed down, ruling out military force and announcing a "framework deal" for the Arctic. He suspended the tariffs scheduled for February 1.

• Market Reaction: Global indices rallied immediately. The Russell 2000 hit a record high, while the Dow, S&P 500, and Nasdaq jumped over 1% as the "geopolitical risk premium" evaporated.

Impact on Employment and Interest Rates

While the rally provided temporary relief, its long-term impact on fundamental data is complex:

• Employment: The rally boosts business confidence, but labor markets remain "bifurcated." Recent data shows low hiring and rising layoff concerns. A brief market surge rarely reverses long-term cooling in the labor sector, though it may prevent a "panic" freeze in hiring.

• Interest Rates: The Fed remains in a "conundrum." While the tariff reversal prevents an inflationary "cost-push" shock (which would have forced rates higher), the underlying labor weakness is actually the stronger argument for lower rates.

Will the Rally Continue?

Analysts are cautious. The rally is primarily a relief bid rather than a surge driven by new growth. Since the "TACO" pattern relies on the removal of self-inflicted threats, many believe the market will remain range-bound until there is more clarity on the January 28 FOMC meeting. Without structural economic improvement or a definitive "Greenland deal," the rally may face a "fade-the-extreme" environment.

Appreciate if you could share your thoughts in the comment section whether you think the TACO pattern could continue to push the rally but when more clarity on the January 28 FOMC meeting could make the rally face a "fade-the-extreme" environment.

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire @MillionaireTiger appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.